Recent Developments in Family Law
COURT FINDS IT IS AN ABUSE OF DISCRETION TO BASE SUPPORT ON THE PREDICTED RECEIPT OF A BONUS THAT MIGHT NEVER MATERIALIZE. IN RE MARRIAGE OF MOSLEY, 165 CAL.APP.4th 375, AUGUST 14, 2008.
Husband (H) and Wife (W) were both lawyers when they divorced. H was a partner in the real estate division of a large law firm and W was a stay-at-home mother with five children. As a result of the downturn in the real estate market, H’s firm pared down its real estate practice and H was terminated from his employment. He obtained a job working for a home builder at a much lower salary. The new employer also offered H a discretionary year end bonus. H asked the trial court to reduce his child and spousal support obligations to W because of his reduced base income. The evidence at the hearing showed that H needed all of his net take home pay from his base salary to pay his child support and spousal support obligations. He had to borrow to pay his own monthly expenses in hopes of receiving a bonus to repay the loans.
APPELLATE COURT DECISION
The District Court of Appeal that serves Orange County (4th District, 3rd Division) reversed the ruling of the trial court. The issue before the Court of Appeal was whether the Judge should be bound by the past income (i.e. the receipt of the bonus) in determining the future support. The Appellate Court answered “no”. The court held that past income is a good measure of future income for purposes of setting support but it is not always determinative. The Judge has the discretion to adjust the monthly net income if it does not accurately reflect future earnings. The Appellate Court sent the matter back to the trial court for a recalculation of H’s support obligation to W.
We think this case was decided on its unique facts. First, H had gone from a high paid position as a partner in a law firm to in-house employment with a home builder at a lower base income. He had only one year of employment with the home builder which was deemed not long enough to be a good predictor of his future income.
Next, he was employed in the real estate industry. The Appellate Court was well aware of the precarious nature of the real estate market.
Finally, H had to borrow to pay his expenses during the year in the hope of receiving a bonus to repay his loans. It was deemed to be unfair to him to have to borrow money to meet his personal expenses while wife received nearly all of his net take-home pay.
The Appellate Court noted that if and when H receives a bonus, a percentage of the bonus could be allocated as additional child and spousal support.
A WORD OF CAUTION
Allocating uncertain future income as additional support presents many potential problems. Family law judges and attorneys often refer to these allocations as Ostler/Smith orders (In re Marriage of Ostler and Smith (1990) 223 Cal.App.3rd 33). The idea is that the support payor pays a fixed percentage of any future income as additional child or spousal support.
By way of example, assume that H has a base income of $10,000 per month. H has the opportunity to earn additional income by way of bonus, commission, stock options, stock grants, etc. H agrees to pay W fifteen percent of his income in excess of $10,000 each month as additional child support. In January H earns $15,000. Therefore, he must pay W $750 ($15,000 – $10,000 = $5,000 x 15% = $750).
This sounds like a simple and fair solution to the problem of what to do about a payor whose income is variable. But consider these problems:
- What about the payee (recipient) of the support? Shouldn’t the income of the payee be considered too?
- What happens if the payor receives non-monetary compensation (i.e. a car, reduction in hours, paid vacation, etc.)? Shouldn’t that be considered for the purpose of calculating support?
- What if the payor delays payment or under-pays? Who pays for the cost of enforcing the order? In our example, does it make sense to spend time and money collecting $750?
- If you were the payor, do you want to provide weekly, monthly, quarterly, or annual accountings to your ex-spouse? If you are the payee, do you want to monitor these accountings?
We have seen many cases of Ostler/Smith orders that have resulted in expensive litigation for the parties to sort out the child and spousal support obligations. While the orders seem fair and reasonable in theory, in practice they tend to cause conflict and they result in litigation expenses. These orders should be entered into with extreme caution and care.